On November 8, the state of Oregon declined to pass through an initiative which would have severely impacted corporate tax rates. The initiative – known as Measure 97 – was targeted toward Oregon-based C corporations which brought in upwards of $25 million in gross sales in a single year. Corporations bringing in $25 million or less would have been unaffected by the measure.

Measure 97 would have compelled C corporations (with sufficient gross sales) to pay an additional tax of 2.5 percent on top of their original rate. However, businesses classified as “benefit companies” – meaning a business which has aims to either help the community or the environment – would have been exempt from the extra tax even if they brought in sufficient revenue.

Rationale

Oregon currently has no sales tax and also has one of the lowest state corporate tax rates in the union. Proponents argued that Measure 97 was a logical step to bring Oregon’s tax policy closer in line with other states. Supporters of the initiative also argued that the increase was needed to raise funds for a variety of public projects, including education and healthcare. If the measure had succeeded at the ballot box, Oregon would have likely received an extra $3 billion annually in tax revenue.

Defeat

Measure 97 was shot down by a clear majority of voters; the initiative received 1,141,677 votes for “no” and 792,094 votes for “yes” (or 59.04 percent vs. 40.96 percent). Opponents cited the fact that the new state corporate tax rate imposed by the measure would have been among the highest in the country.

Interestingly, the battle over Measure 97 was the most expensive ordeal in Oregon’s history. Supporters and opponents of the bill raised a combined total of approximately $42 million in preparation for the ballot.

Measure 97 certainly would have given the state pocketbook a large boost. However, too many people saw its flaws and so Oregonians will have to think of another way to address shortages for public needs.

Back in October of 2015, the European Commission ordered the Dutch government to recover approximately €30 million (or about $34 million) from Starbucks. The EC determined that the arrangement made between the two entities was illegal and had given Starbucks an unfair advantage in the marketplace. The Netherlands and Starbucks are expected to appeal the decision.

The EC ruling is significant for a number of reasons. For one, it brings attention to the complex maneuvers multinational corporations employ in order to receive the best tax treatment. And it also highlights how serious the European Union has become in its efforts to crackdown on tax avoidance. While the sum that the Dutch government is required to recover in back taxes is not outrageously large, the decision may prove to be extremely important as a portent of future events.

The Decision

The European Commission found that the tax deal made between the Netherlands and Starbucks enabled the multinational coffee company to shift profits and dramatically lower its tax burden. Through its ruling, the EC intends to shut down the tax avoidance strategies utilized by large companies. Such strategies are usually highly sophisticated and unavailable to start-up companies and small to medium sized businesses. Hence, even though Starbucks maintains it didn’t violate any established rules, the arrangement compounds the preexisting economic advantage Starbucks already possesses.

Although it may be tempting to immediately side with the EC, it should be kept in mind that EU states face an increasingly competitive world and tax deals are just one means to attract foreign investment. And if Starbucks is able to employ complex tax strategies which give it an advantage, perhaps this is just a natural consequence of how the market works? And besides, even if this ruling curtails tax avoidance strategies in the short-term, what guarantee exists that companies will not respond with even more creative strategies in the future?

Starbucks may be stuck with a sizable tax bill, but the days of sophisticated tax structuring are far from over.

The European Commission has recently ordered multinational tech giant Apple, Inc. to pay €13 billion to Ireland to settle back tax debt. The EC concluded that the deal made between Apple and Ireland was illegal and aided Apple in avoiding its proper tax liability. Though it is not the largest corporate back tax bill by a long shot, this tax bill will certainly spell substantial changes in the way Apple conducts its tax affairs.

Commissioner Margrethe Vestager determined that the Irish deal enabled Apple to pay an effective tax rate of just 1 percent on its European profits in 2003, and that this sunk to just 0.005 percent in 2014. The European authorities have put Ireland in charge of recovering the €13 billion (approximately $14.6 billion) from Apple.

This new tax bill can accurately be perceived as an inevitable consequence of Apple’s practice of using creative accounting strategies to avoid tax obligations.

Context

Apple has used three primary methods to minimize its tax burden: deferral, transfer pricing and check-the-box. Deferral simply allows U.S. firms to avoid paying U.S. tax on income earned abroad until it is physically returned to the states. In reality, companies often keep international earnings offshore indefinitely and thus avoid paying tax altogether. Transfer pricing is a bookkeeping method used by companies to distribute expenses among their affiliates. Apple is able to utilize transfer pricing to its benefit by charging small fees to foreign subsidiaries for use of its intellectual property; in this way, Apple maximizes the profits of its affiliates and minimizes its intellectual property income in the U.S. Check-the-box allows firms to classify their affiliates as “disregarded entities” which are not subject to U.S. income tax.

The deal struck with Ireland further enhanced the effectiveness of these strategies. Apple set up two entities in Ireland through which it was able to channel two-thirds of its pre-tax global income. The income which passed through these Irish entities did not return back to Apple but was instead routed to the U.S.-based bank accounts of these entities. This allowed the income to avoid U.S. tax.

Final Thoughts

The European Union is trying diligently to crack down on faulty agreements between multinational firms and EU member states. European authorities have already ordered the Dutch government to recover €30 million from Starbucks and demanded that Luxembourg recover roughly the same amount from Fiat Chrysler. Both Amazon and McDonald’s are also likely to face similar treatment in the near future as a result of their dealings with Luxembourg. Though creative accounting will almost certainly continue well into the future, it appears that European authorities will take an increasingly aggressive approach to enforcing EU tax laws.

Apple certainly has the cash to settle its tax bill. And its relationship with Ireland is likely to suffer little as Ireland still has a relatively low corporate tax rate of 12.5 percent. However, it seems clear that Apple will have to employ cleverer strategies in the future in order to dodge the European taxman.

Tax issues in the corporate world are plentiful. If you’re a current or future business owner interested in learning about how entity selection can help your tax liability you should view this presentation by our principal John Huddleston

With total earnings of approximately $74.5 billion for 2015, Google is truly a multinational corporate juggernaut. International sales constitute a substantial portion of Google’s overall revenue source. Presently, sales in the United Kingdom make up about a tenth of Google’s entire income. In recent years, a controversy has developed over Google’s supposed attempts to divert profits in an effort to avoid paying the typical corporate tax rate for U.K. sales. The standard corporate tax rate in the United Kingdom is 20 percent. By way of a host of creative strategies, Google has historically paid nothing close to this rate. Two recent developments — a settlement regarding Google’s back tax debt and a law passed by the British parliament — have helped create a measure of progress, but the matter remains far from fully resolved.

In the last three years, Google has managed to keep its effective tax rate on foreign (i.e. non-U.S.) profits at 6.6 percent. There appears to be some uncertainty over the exact rate paid by Google in the United Kingdom: some allege the rate is as low as 2.5 percent, although Matt Brittin, Google’s president in Europe, states that the rate is much higher.

Back Tax Deal

In January of 2015, a settlement was reached regarding Google’s past tax liability stretching back to 2005. Google agreed to a sum of $130 million (approximately £190 million). While many cite the deal as a clear triumph for the British government, many others see it as overly gentle on Google. Though the issue of profit shifting still lingers, this settlement brought at least some degree of satisfaction for the U.K.

Diverted Profits Tax

In its Finance Act of 2015, the British government included a provision called the Diverted Profits Tax — informally referred to as the Google Tax — which attempts to shut down the improper shifting of profits to offshore tax havens. In the past, Google has avoided paying the standard corporate tax rate on most of its U.K. profits due to its practice of shifting these profits to other venues, primarily Bermuda. The Diverted Profits Tax will attempt to halt this practice and implement a 25 percent tax rate on funds being shifted in this fashion.

There is uncertainty whether Google will comply with the law as Google contends that it already pays its fair share of taxes in the U.K. Only time will reveal precisely how the matter will be settled.